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Wondering what that 1099-DIV is that you just received in the mail? As we head into tax season, Booth guides you through what dividends are, how they are taxed, and the difference between ordinary and qualified dividends among other topics.
Find more educational material and lifestyle tips on boothparker.com!
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Find more educational material and lifestyle tips on boothparker.com!
Get Booth's financial newsletter by signing up here.
Email Booth: bsp@boothparker.com
This podcast is produced by Rooster High Productions.
- (00:00) - Understanding Your 1099-DIV
- (00:15) - What is a Dividend?
- (02:08) - Ordinary Dividends
- (02:47) - Qualified Dividends
- (04:14) - Reinvested Dividends
This podcast is produced by Rooster High Productions.
Creators & Guests
What is MOM-enomics with Booth Parker, CPA?
Real moms. Real mom financial issues. Real moms in business. Real stories. I am Booth Parker. A CPA, wife, and mom that loves all things home and family. In this podcast, I talk all things money for moms, families, and small business. From tips to ideas to info you just need to know, I break it down so moms can apply it to their own families and businesses!
[00:00:00]
What is a Dividend?
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It is the time of year when those 1099s start showing up in your email or even in your physical mail. And one of the 1099s you may be receiving is the 1099 DIV. D I V. And you may be wondering why you got it, what it is, and does it mean you owe taxes on this money reported on this 1099.
So let's start with what is a dividend? So a dividend is a percentage of earnings that a company pays out to its shareholders. They are generally paid in cash. They can also be in the form of stock or other property. But since they are generally cash, that is the type we are going to [00:01:00] focus on today. So for example, company XYZ has a million dollars of net income for the year.
The Board of Directors decides to declare a dividend in the amount of 500, 000. There are 500 shareholders of XYZ, so each shareholder is getting a thousand dollars. That thousand dollars would be reported on 1099 DIV. So are those dividends taxed? Unfortunately, yes. But, the rate is going to differ depending on if the dividends are ordinary or qualified.
So, if you look back, remember box number 1 on this form, there's a 1A and a 1B. That is the most commonly used box on this form and the one we're focused on here today. Since those are the most common type of dividends you're going to have reported to you. [00:02:00] So, how are they taxed? Depends on the Ordinary vs. Qualified classification.
Ordinary Dividends
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So Ordinary Dividends, they're also called Non Qualified, you may hear those two terms interchangeably used. So these are taxed at your Ordinary Income tax rate. So, whatever tax rate you pay for your W 2 income or maybe you're a small business owner, that is the rate that ordinary dividends would be taxed at.
So, most dividends that fall into this category are going to be from bond like instruments, money market funds, and dividends from employee stock option plans. Those are the most common for ordinary dividends.
Qualified Dividends
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Qualified dividends are the type of dividends you're probably the most familiar with. And the good news is, is that these are taxed at 15 percent for most taxpayers.
If you're [00:03:00] an extremely low earner, they can be 0%. If you're an extremely high earner, it can be a much higher rate. So, but for the general public, basically, the tax rate on these qualified dividends is going to be that 15 percent amount. So what makes it a qualified dividend? So here are the requirements.
The payout must be made by a U. S. company, a foreign company that trades in the U. S., or a foreign company with a U. S. tax treaty. So that part is pretty straightforward. You can think of your Amazon and your Apples and and companies like that that you may stock in and receive a dividend from. The second part is you must hold the shares for more than 60 days during the 121 day period that starts 60 days before the ex-dividend date.
So, if the dividend date is [00:04:00] November 30th, that, 60 days prior would be October 2nd kind of thing. So the general rule of thumb is that if you If you own the stock for at least a few months, then you should be good to go.
Reinvested Dividends
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The other question people ask is what if my dividends are reinvested? So you may have a broker or someone like that assisting you with your investments and you've given them the instructions that if any of your stock investments pay a dividend to reinvest the money. So Those reinvested dividends, even though you don't actually receive the cash because it's going right back in to be reinvested, you do still owe tax on those dividends.
So our example just a minute ago, if you were a shareholder of XYZ and received a dividend, and I put dividend, I mean received in quotation marks because you didn't actually get the [00:05:00] cash, but you did receive a dividend of $1,000. You would owe tax on that $1,000 even if you never actually personally received the cash and put it in your checking account and all that kind of stuff because it was immediately reinvested to purchase more shares XYZ.
Even if you do that, you are going to owe tax on that $1,000. So if you have made the choice to reinvest dividends receipt, you want to make sure you have a plan to pay the tax due on them. You are generally able to know if a stock is one that typically pays an annual dividend or not. It's pretty easy to search, dividend, dividend paying stocks and stocks that don't usually pay dividends.
So, if you're after the dividends for money, to live off of, then you wouldn't reinvest them, you would still owe tax on the dividends. If you're looking for ones that pay dividends to have money being reinvested, [00:06:00] just make sure you have a plan to pay the tax due on those reinvested dividends. I hope this helped clarify the tax you may owe on that 1099-DIV that shows up in your mailbox.